Tax Consultant, Spofforths
Whether you’re letting your property or you’re planning on selling it, the opportunity to reduce your tax liability is no doubt at the forefront of your mind. But it’s important to understand the types of expenses and the reasons why they have been incurred before determining whether or not they can be offset against your income.
Only revenue expenditure is deductible against any rental income you receive; the most common expenses being agent fees, insurance, accountancy fees, repairs and finance costs. Generally, it will be easy to determine whether these costs are allowable or not but there are complications to the rules which may mean the expenditure you can claim is restricted.
Financing costs is one of the areas where the total costs you incur for any one tax year may not represent the reduction available in your profits. Only mortgage interest is allowable as a revenue expense and so where you have a repayment mortgage you will need to understand the proportion of the monthly mortgage payment you can use in your calculations.
Repair costs are also a complicated area, with general property maintenance costs allowed to be included in your calculations. But where the repairs could be perceived as improving the property, these costs are likely to be considered capital in nature and so have to be set aside until you sell the property itself.
What constitutes as a repair can be difficult to determine and open to interpretation and the general rule is that a like-for-like replacement defines a repair. However, if you have replaced an item with a significantly improved version then this becomes a capital cost. HM Revenue & Customs provide examples of when costs, potentially capital in nature can be considered as a repair, even though technology may have moved on since the initial cost was incurred. For example replacement windows; even if you have replaced a single-glazed unit with a double-glazed one, providing you have replaced the original with a modern-day equivalent, then these costs should still be considered a repair. The same can be said for kitchen units and bathroom suites.
Where you are providing rental properties with some level of furnishing it may be possible to claim an additional deduction known as a wear and tear allowance. This is equal to ten per cent of the rents you have received on the property less any costs you should not be incurring as a landlord, such as council tax and water rates. This ten per cent deduction represents the general wear and tear of the furniture in your property and is only applicable to properties which are let in a manner whereby the tenant can move in and not have to provide any furniture.
Alternatively, up until April 2013, you were able to claim the full cost of any replacement white goods and moveable furniture in furnished properties against your profits. This is still possible, although the scale of replacement items is limited to small tools such as utensils, light bulbs and smoke detectors.
You can no longer claim for single replacement items in unfurnished properties, which used to cover white goods or similar, but you can still claim the costs of replacing a kitchen or bathroom as this falls within the general repairs definition mentioned above.
The timing of expenditure is also important, related to when you decide to let your property. If the work is being done before you let the property to the first tenant or whilst you are living there, then these costs are unlikely to be deductible against any rental income, even if revenue costs in nature. However, if the work is being done between tenants then these costs may be allowable in certain circumstances. This rule is not exhaustive but demonstrates the importance of timing.
As you can see, the rules relating to what costs can be offset against your property income can be complicated. In all situations I recommend that the relevant receipts are kept to support any claim being made on your tax return.